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Blue-Ribbon Panel Narrows Field for Private Company Financial Reporting

A
blue-ribbon panel weighed in on seven alternative models for private
company financial reporting at its meeting Monday, eliminating
models that were based on IFRS and a model that effectively would
have maintained the status quo.

All
of the remaining models under consideration by the panel would
result in differences in GAAP for privates companies, where
warranted, compared with GAAP for public companies.

The
panel directed its staff to come back with a narrowed down list of
U.S. GAAP-based standard setting models. The models presented by
panel’s staff Monday represented several variations of models based
on U.S. GAAP and IFRS. The panel agreed to focus in on three of the
U.S. GAAP-based models to create two or three hybrid models that are
more detailed and focused.

The
three primary models that are advancing for more consideration are:

U.S.
GAAP with Exclusions for Private Companies—with
enhancements

U.S.
GAAP—Baseline GAAP with Public Company Add-Ons

Separate,
Stand-Alone GAAP Based on Current U.S. GAAP

Regardless
of which model the panel eventually selects to recommend, several
panel members said the group that sets those standards needs to
understand the needs of the users for whom they are designing the
standards. Most of the panel members expressed discontent with the
current makeup of the FASB board and noted its heavy—but
appropriate—focus on public companies. This was the center of debate
on the structure of whatever model is ultimately selected—thecurrent FASB board; a restructured FASB board
(with greater private company representation); or a new, separate
Private Company Standards Board under the oversight of FAF.

The
panel, meeting in Chicago, recommended exposing a series of
questions related to the potential standard-setting models for
public comment through FASB's website by the end of July to ensure
that it isn’t leaving out any critical elements or pieces of
information for consideration.

All
comments will be made public on the FASB website and the panel’s
staff plans to summarize the comments and present them to the panel
members at their Oct. 8 meeting.

The
18-member panel, which was announced in December 2009, is tasked
with providing recommendations on the future of U.S. accounting
standards for private companies by the end of this year. It is part
of a joint effort by the AICPA; the Financial Accounting Foundation,
FASB’s parent organization; and the National Association of State
Boards of Accountancy. Panel chairman Rick Anderson, chairman and
CEO of Moss Adams LLP and a current FAF board member, said he would
like any recommendations to be ironed out by the panel’s Dec. 10
meeting.

Anderson
said that selecting a model that is relevant to the users of private
company financial reports should be the No. 1 focus of the panel
moving forward, noting that seemed to be the consensus view at the table.

“Relevance
is the overriding issue. It’s impacted by complexity, cost benefits
[and consistency],” Anderson said. “Does this make the financial
statements more useful and better for the intended audience of those
statements? [If so,] we’d be moving in the right direction.
Relevance—it’s the word and concept that cuts across all of this.”

If
the changes are relevant and reasonable, users will get the
information they need, even if that means certain differences
between public and private company GAAP, added Dev Strischek,
senior vice president and senior credit policy officer,
Corporate Risk Management for SunTrust Banks Inc.

“It’s
more about relevance than anything, not necessarily complexity, we
can always deal with that,” said Krista McMasters,CEO of Clifton Gunderson. “[But] when the most
complex issues are the least relevant and most costly, we need to
deal with that.” She added that the “most troubling” issue to her is
the increased number of users she sees accepting “except for”
qualified opinions. “When generally accepted accounting principles
isn’t accepted anymore, that’s troubling,” she said.

“Users
were not in love with all of the GAAP standards that exist today.
They take financial statements in accordance with GAAP and made
adjustments. If standards change, they could live with that. They
are open to different standards as long as there are legitimate
reasons for different standards,” Anderson said at the start of
Monday’s meeting, summarizing previous meeting discussions. However,
he noted, some panel members have expressed concern over the fact
that users aren’t demanding change.

“Historically,
they haven’t risen up but accepted the new standards whether it’s
one they wanted or not,” he said. “Change needs to be supported by
and accepted by the user community, not necessarily driven by them.”

What
Kind of Board?

Discussion
at the meeting included what body should set accounting standards
for private companies.

“The
attitude on the FASB board is that one size has to fit all,” said
Judith
O’Dell,panel observer and chairman of
FASB’s Private Company Financial Reporting Committee. “It’s very
hard to get any carve-outs and differences in the private company
world. The goal is to raise standards of private company financial
statements, not dumb it down.”

FAF President Terri Polley acknowledged that FAF has been
hearing these concerns. “Clearly we have a disconnect with private
company constituents. We need to understand the root cause of that
disconnect,” she said.

AICPA
President and CEO Barry Melancon advocated a board separate from
FASB to oversee private company accounting standards.

“I
believe it isn’t practical to have one board set both private and
public company standards. It isn’t just a matter of private company
representation. We’ve had private company representation on FASB in
the past and that hasn’t produced significant differences in GAAP,”
Melancon said. “I believe FAF should establish a separate board for
private companies, let the currently constructed FASB still drive
the train and set public company standards, but have the new board
constituted solely with individuals that are focused on private
companies decide whether, what and how GAAP should apply to private
companies starting with the FASB standards.”

David
Morgan, co-managing partner of Lattimore, Black, Morgan, and Cain
PC, supported the idea of a separate board.

“I’m
not sure [FASB is] capable of listening because of its bias toward
public companies,” he said. “You can put an alien and an earthling
in the same room together, but they aren’t going to get the same
results. They have different needs. Trying to convince the other
side what private company needs are is a futile process.”

To
get the necessary changes in GAAP for private companies, there needs
to be a separate board setting that GAAP, added Daryl Buck, senior
vice president and CFO, Reasor’s Holding Co. Inc.

A
recorded audio stream of Monday’s meeting should be available at fasb.org in the near future.